Q1 2022 Digital Ally Inc Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to digital Allys 2022 first quarter operating results call. At this time all participants lines are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one.

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This conference call may contain forward looking statements within the meaning of section 27, a of the Securities Act of 1933 and section 21 E of the Securities Exchange Act of 1934.

Words believe expect.

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Could we.

Will.

Fewer.

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Made by inaccurate assumptions and are subject to various ultra serious and known and unknown uncertainties.

Number of which are beyond our control therefore actual results could differ materially from the forward looking statements contained in this document and readers are cautioned not to place undue reliance on such forward looking statements digital ally will undertake no obligation to publicly update.

Or revise any forward looking statements, whether as a result of new information future events or otherwise.

Wide variety of factors could cause or contribute to such differences and could adversely impact revenues profitability cash flows and capital needs.

Can be no assurance that the forward looking statements contained in this document will in fact transpire or prove to be accurate.

If you require any further assistance. Please press star zero and you spend most of todays conference is being recorded I would now like to hand, the conference over to your first speaker today Stan Ross.

Chief Executive Officer. Thank you. Please go ahead Sir.

Thank you and thanks, everybody for joining us today.

<unk> to be able to report our.

Our numbers I have with me Tom Heckman, the company's CFO he'll go into in depth details.

The numbers in the operation but.

Cited to see it come in in the first quarter numbers in excess of $10 million that was pretty much in line with what our expectations more which also helps us.

Validate and continue to believe in our 50 million guidance that we've given for 2022.

So let's jump right into the numbers I'll turn this over to Tom Heckman our CFO .

Thank you Stan and welcome to ever want I appreciate you joining us today.

Just to let you know we did file our Form 10-Q on Friday and I do encourage everyone to take a look at that for more in depth analysis of.

What went on during the first quarter my remarks here will be pretty summary in nature and I do do encourage you to look at the 10-Q for more.

And Dale in depth review of the quarter.

If you look at the first quarter on the surface. The first quarter revenues increased over 300% or actually 306% to $10 3 million in.

In the first quarter 2022 versus two and a half million in 2021, obviously the acquisitions were a big part of that is they represented $8 3 million of revenue in Q1, 2022, which is over 80% of total revenue. So you can you can see the the serious impact.

These acquisitions are having at least on our top line, which is very favorable force I will speak more on a segment by segment basis, a little later in this in this analysis.

Net excuse me net income for the quarter showed a loss of $6 7 million versus income of $21 7 million in 2021, the first quarter of 2021.

But I will tell you. The primary reason for that is is the derivative income.

We record each quarter and I think I've I've cautioned everyone. Previously that's a noncash kind of an accounting fiction, if you will rather than a true.

Dallas This or a review of our operating results for the quarter that.

That was the.

The derivative income for the first quarter 2021 was $24 5 million in 2021 versus only 150000 and 2022, so clearly a decline of $24 $3 million was attributable just to this derivative income.

Representative of the change in the warrant value that are outstanding if you exclude the derivatives.

The income.

Our 2021 net income would have been our net loss would have been $2 8 million versus $6 seven for for 2022, so much more in line with what we did in 2022, Okay. Let's look at the segments lets look at first our legacy business, which is law and.

<unk> video systems.

Excuse me revenues from products declined to $1 3 million from $1 9 million in the year ago quarter.

Service revenues were a little bit up to flat during that same period.

What I attribute to the change in the revenues in the legacy business really due to the introduction of new products.

Which we're very excited about by the way it is in the body Cam area. We introduced the first view pro and the first few too in the fourth late in the fourth quarter 2021, and as you might expect are.

Channel our cost in our inventory.

<unk> were clogged and we had difficulty getting the man we have customers wanting to review and look at this new technology that we're putting out there so they've delayed purchases, which we believe will come in later in the year. In fact, we're very happy with some of the preorder.

Sales that we're seeing in those two new products.

We also.

To see a migration from outright product sales hardware sales upfront where people are using the subscription model, which which is more of a service.

Method, which we amortize or receive payments over anywhere from 36 months.

60 months, so it really equals out the the revenue stream over a longer period of time, rather than having it upfront sales. So that was a contributor contributory factor to the first quarter decline in product sales. Our gross margins also declined to 13% from 32%, which is a pretty pretty big drop.

But as you might expect that once we started introducing these new body camera models, we did take write offs of older.

Body Cam inventory as well as some of the some of the older in car video systems. We did also have some sizable write offs in our PPE or personal protective equipment group, which is our shield business. So that's what happened to our gross margins in the first quarter for the legacy business.

If you look at the ticketing segment, the ticketing segment generated $6 4 million of revenue in the first quarter 2022, which was which represented 60% of our total revenues for the quarter.

That I mean, thats, a very nice number, but we were hoping for higher revenue figures in that and our revenues in the first quarter were challenged by a couple of factors.

Obviously, the over overriding concern as the omicron variant and the effect it had on group gatherings and cancellations of.

Vince in that and especially some of our older audiences or customers that go to the ballet.

Hopper and such which is a big segment of our ticketing big business.

<unk> away from that because of the effects of AUM across so that did have a pretty big effect on us, but I will also say that we're seeing we were told and now we're really seeing that the ticketing segment is very seasonal in nature in.

In the first quarter, you have the ending of college football as well as pro football.

Which is a very big part of our business.

And then you couple that with the fact that the major League baseball players Union struck during the first quarter, which delayed well actually canceled some spring training games and also delayed the regular season. So we had kind of a double whammy from the major League baseball also.

Across the board and I have been looking at up and last year, there was a significant.

Significant decline overall in attendance at major League baseball, we're seeing that continue in 2022%.

Obviously weather is a factor that it has been cool and dampen a lot of the major league cities. So.

That hopefully will bounce back for us as well, but it did have a a.

The impact on our revenues in the first quarter the overall.

We are monitoring the health of our customers with with inflation and all the other matters that are hitting our customer base.

And we're monitoring why the reluctance to go to some of our bigger events that we have tickets to so.

Well, we'll keep keep an eye on that and hopefully be able to improve our our revenues from that standpoint, our gross margins in the first quarter 2022 was was at 15% which is also disappointing.

Given the level of revenues that we had we did have a higher than normal write off of unused tickets.

And below cost below sales below cost in the first quarter.

Which is which is understandable based on.

What we talked about in revenues the seasonality the omicron cancellations of baseball games, all of that led to a higher than normal write offs of unused tickets in sales below cost in.

In the first quarter also I would tell you we've entered into some rather large sponsorship deals late in 2021 and also in 2022.

And I'll tell you why that matters, we did enter the USA today get net contract.

My Heart media contract.

Sinclair broadcasting contract among a bunch of others, but those are the larger ones and the way we account for sponsors shifts like that knees are significant payments significant obligations.

Estimates that we have made in that business. The accounting is that we amortize the cost of those sponsorships on a level basis over the terms of the agreement so.

The expense of those sponsorships of the same in month, one versus month 12.

It was a one year contract or a month 36, or if it's a three year contract. So we level out the expense.

However, you look at the revenues are much more backend loaded as you just start off on a media campaign or a.

<unk> that were were advertising on in sponsoring.

It takes a while for customers to get comfortable with that and see where it's at no word SaaS and be comfortable with a click through revenue. So that the revenues are often backend loaded, whereas the cost of it or a level yield. So we do expect and have seen some losses.

In early in these sponsorships only only to reverse in the later months of those contracts. So we're hoping that that trend continues and we see dramatic improvements in our cost of sales and therefore gross margins on a go forward basis.

If you look at our revenue cycle management segment, we did $1 9 million in revenue or 18% of total.

We completed two acquisitions in 2020 in entire 2021, which began I think in June .

June of 2021.

During the first quarter alone we completed two acquisitions.

In 2022, one was for roughly $2 million or one was smaller at about $350000. So we're continuing to continuing our path of acquisitions and one would as we acquire new businesses medical billing businesses. Obviously revenues will continue to increase and that's that's what we're looking for.

By doing the roll up strategy in that area, our gross margins were pretty strong at 37%.

It was very good, but we could probably have done a little better one of our major acquisitions early in 2022 was a dental billing company, whereas all the other ones have been medical billing and our dental billing acquisition is kind of breaks the mold a little bit in that it uses a national footprint there.

Recruiting and trying to acquire new customers on a nationwide basis, whereas our medical billing companies are much more regional local to regional businesses.

And their cost.

Customer acquisition is much higher than the medical cost of billings. So.

That hit our margins in the first quarter as well as this is a this dental billing company as a high growth, but high cost of acquisition of new customer business. So it did damage our margins and actually resulted in I think negative operating margins.

In the revenue cycle business, but we are very very high on that business. We believe it is headed in the right direction.

We do believe that our success with all of these acquisitions really do nothing more than prove that our template our acquisition template is good and strong and appealing to customers and just on a general basis, we're looking for medical billing or dental billing agencies.

At about one times revenue and three times EBITDA. So.

Very very modest.

Purchase template.

Price template from that standpoint, which we believe that once we get them inside the business and half time and I'm talking six nine maybe 12 months out doing a full integration, where we install our people are our systems and such that will even reap better margins in.

Operating margins at the end of the day. So so on an overall recap for the first quarter. Our revenues are very good for Q1, our gross margins were not where we wanted them to be but we know where our problems are and why that happened and we're working on those and we believe future quarters will prove that right with inquiry.

Revenues gross margins and operating margins.

If you look at our balance sheet. It remains very strong we have cash balances of $20 5 million at the end of the quarter. We got positive working capital of $19 5 million and stockholders equity of $47 5 million. So our balance sheet is very strong and it will give us the the back.

Backbone to go out and do more acquisitions on a selective basis and improve our business model.

So with that I'll give it back to Stan yes, Thanks, a lot Tom and again I just want to reiterate some of the.

Things that both the.

Medical billing division has been doing.

As we mentioned on our year end call. They have some letters of intent already out there for a couple of acquisitions that they hope to get completed fairly soon.

I will say on ticket smarter congratulations.

Since the end of.

The first quarter I think they've announced not only just recently a deal with the sporting news, but also fan sided and the professional fighters League.

Got quite a bit of.

Exposure in press as well.

I've noticed a lot of the business wires pick that one up.

Because of the tension that is given to that up and coming the powerful league that's out there rivaling the UFC and others. So.

Both of those entities are really doing very well the legacy business with the new body cameras and in car system is doing very well we're seeing.

Some good opportunities in our commercial business.

We hope to be making some announcements on very soon on some strategic.

Alignments that we're making there.

So it's been Ben.

An exciting year for us 2021 and 2022.

You can see why we're enthusiastic and still feel very strong about our ability to meet the guidance that we gave a $50 million for 2022, So what I'd like to do is go ahead and open up the floor for Q&A.

To address any questions you all may have.

At this time, if you would like to ask a question. Please press star followed by the number one on your telephone keypad again that is star followed by the number one to withdraw your question. Please press the pound or hash key please standby, while we compile the Q&A roster.

Your first question comes from the line of Bromal Geneva, <unk> with Aegis capital. Your line is open.

Good morning, Thanks for taking my question.

As you guys evaluate new acquisitions and are integrating the ones, who recently made could you maybe walk us through some of the metrics you think about in terms of profit generation.

Honestly.

It's the time to be investing in these newly acquired businesses and so forth, but how do you think about that getting to a breakeven scenario for smarter and and potential future acquisitions as well. Thanks.

Yeah. Thank you Rommel.

As far as ticket smarter goes.

A different business for us and it really is tougher metal from a customer standpoint, so it's a little more of a bronco horse to ride if you will.

To create templates and that but we're looking at right sizing and being very very much more selective if we can.

Sponsorship.

Contracts that we get into that will be much more.

Predictable if you will in terms of the revenues generated by it.

Some of the problems, we've had or revolve around that and where these these.

Sponsorships that we have also provide us.

<unk>.

They provide us so much value in tickets and we pay them for the sponsorship we turn around have to sell those tickets and as as I mentioned in my part of the.

Discussion here that we did incur some write offs.

For unused tickets and tickets that were sold on a cost and a lot of that was from the sponsorship. So we're we're doing a better job in looking at the sponsorships, we're getting into the number of tickets were getting in return.

The types of tickets were getting in terms and really the dollar in.

That were.

We're required to.

As far as the medical billing business man that is that is very.

I like to call. It mailbox money, if you will its very predictable other than this dental billing business.

The.

Businesses, we buy generally one times revenue three times EBITDA and we believe that once we fully integrate those we'll be able to double the EBITDA based on the same level of revenues. So.

Thats very exciting for us we're able to.

Pretty much bye.

Not as much as we want or every week or anything but there are.

There is appeal out in the marketplace to our template and how we're going about our business and we have a we have a line of potential acquisitions that were able to select from so that's kind of that's kind of the way I look at it.

The ticket smarter.

Is much more difficult to predict and not very.

Predictable from a revenue and cost of sales standpoint.

But we are taking control more control of the sponsorships and through that we'll be able to control better of write offs of tickets in that medical billing. We're excited about obviously, it's been a bright point force, yes, I'll just add a little bit real quick on the ticket smarter.

Sure.

In a sector that I'm really excited about and that is that we've been going out there on some of our sponsorships have been let's say not only the naming rights for appia theatres and in stadiums, along those lines, where not only we get the naming rights, but we also do yet.

Ticketing rights for all events that may be going on at that venue.

So that's one avenue that were just there and as that happens. We're the primary ticket source and there is a little caveat that comes into play here utilizing some of our background in some of the relationships that we have we also will be in a position to bring additional.

<unk> business to those venues to where again were not only.

Have the ticketing capabilities, but we also have the capabilities.

Bringing in the proper acts that would we do believe.

Generate a lot of good revenue and profit associated in certain markets.

The ticket smarter as a lot more.

Opportunities than just driving traffic through sponsorships.

Through our relationships that we have with I heart in the others, but the capability of actually.

Utilizing our relationships with.

Acts that are out there and guiding them or being part of bringing them to venues that we have all the ticketing rights too.

Okay, and maybe one follow up question.

You guys gave us some commentary on the new products that do body worn cameras. The first few prone for Q2.

Wonder if you could just give a little color in terms of the progress on those on that.

Launch here, thus far in 2022.

Is that gaining some new customers for you is it mostly just kind of deeply more deeply penetrating existing customers. Thanks, Greg.

Great question I'm glad you brought that up because it is.

Such a game changer that we are seeing.

New customers that we're able to.

Bring into the digital Allied network far as our legacy business.

Seeing customers that maybe decided that they wanted to go a different.

Our path.

Several years ago that are saying okay.

You clearly have made the innovation again.

We want to come back to you. So we're seeing not only our legacy customers, but some of them are returned some of them are also.

New ones that we just have never had before so great. Great question. Thank you.

Great. Thanks, so much.

The next question comes from the line of Bryan Lubitz with Aegis capital. Your line is open.

Good morning, guys.

Morning, Brian .

Alright so.

Sticking with the cameras, obviously you brought up.

When you go to your guys' website now it looks like you're almost giving the cameras away for free can you talk about that a little bit.

Yes, I think I think it looks that way, maybe because I mean, the industry is really went too.

More of a subscription model and.

So.

Some of the people asked us a little bit about our cash burn and everything.

Let's just say round numbers, a small department orders.

Quarter million dollar worth of.

Body cameras or maybe in car.

And what we end up doing is we have a tremendous amount of that expense upfront, but then they enter into a contract that has been paying 50000, a year over five years and so the margins are really good but that's sort of one of the biggest things that that <unk>.

Got a notice is how the deferred revenue continues to improve as we continue to get these new and large contracts.

I think what we will do is some of the larger ones will go ahead and announce it and make sure and announce it that it was in a.

Subscription format, but again as we continue to build that up and the closer we get to.

Crossover number.

The legacy business is just going to be cash flow on extremely well.

To build on that so it is a very.

What are you will say low entry model that works very very well in today's climate and environment. It also puts us in a little bit of a league.

To where theres not a lot of.

Newcomers are coming in with the capability of putting that program. Together you may you may recall, Brian many years ago.

We battled that with the Exxon I mean they had.

The war chest to sit there and allow.

Agencies.

Full year, just try and their product.

At the end of the day.

They got to pay the Piper.

Realize that but.

We are now.

Strong enough position to where we as well can offer that type of service and that kind of business model.

The business model that you're referencing sort of like the cell phone model, where you guys with the right contract are going to sign these guys up I guess with your partner Amazon Web services for three years to five years is that what you're looking to do there.

That is correct absolutely that is correct.

Now does that obviously is that whats playing into your SG&A with the expenses being up around seven and a half this quarter.

Yes. It comes into play and then obviously when when you're looking at some of the acquisitions that we do in some of the partnerships you get a little heavy on some of the legal side of things as well that come in and some of the fees associated with that but yes. It's there yeah and I would say insurance continues to be an issue for us that's a big part of that.

Chile.

Increase as well as just general inflation travel for our people is up the cost of travel is up.

So yes, I mean, we're getting hit from from the inflationary side as well as were reopened at a business a.

A year ago, we were we were mothballed really and doing very little travel if at all and now we are able to travel and go see our customers and do our technical.

Integration and such so.

Yes, we're seeing that.

So the expansion obviously is costing more where do you guys look for for sweet spot per quarter for that number are you looking to be in that seven are you looking to be five or do you guys have an idea of where we should expect to see those those expenses.

Well.

Component, especially in the medical billing area, where youre just going to have more G&A. If you will as you acquire more businesses. So if you exclude that yes, I think we're on track to maintain that line when youre looking at the legacy business plus ticket smarter.

You got to realize that the medical billing is growing.

And it'll be linear if you will with the amount of acquisitions, we do there.

Okay Awesome and now obviously this quarter was hit a little bit by bad weather for for the tickets and things of that nature, you guys still feel confident that youre going to look at $50 million for the year. So do you expect next quarter to be do you expect all the quarters to be the same around $13 million to $15 million or do you expect it back ended what should we expect in terms of revenues moving forward.

I think I think youre going to see them.

First and.

Second quarter from everything we're learning is sort of the weakest of the quarters. When it comes to us at least the ticketing side of things, Okay and again, we think that the legacy business is our <unk>.

<unk> that we've had out there and the new customers and new product filling that pipeline.

And traction there. So I think you've got the expected sort of the walk up but with the third and fourth being strong because even in even in the.

The second quarter were here I mean, you still got a lot of kids in school, they're just now wrapping up I mean.

My daughter, I think finally gets out this week and so when that starts happening in everyone's out of school and they start going to the ballpark and the weather's better.

We'll start to see that.

To pick up I mean, you'll start to see the the music festivals pickup youll start seeing lot more concerts and outdoor venue. So so it's just it gets stronger I would say about that this time of year at June <unk> kicks in pretty good and then it should just continue to work on up but you've got.

Football around the corner so yes.

It is what it is I mean in regards to the seasonality and that's only because of the amount of events that are available to go to and which ticketing.

As an issue that's why I love. The fact that we're looking at that the diversification I mean, obviously the legacy business.

Our central business with law enforcement, the commercial business, where when you are talking about.

Trucking companies and fleets along those side of things.

Virtually essential the medical billing central.

So a little bit of a wildcard would be the ticket but.

With what we're doing and picking up venues that.

Theyre more stadium, maybe enclosed where weather won't come into play as much.

Things along those lines.

We can protect ourselves a little bit there.

Right.

And this is my last one for you guys. So far.

When you guys acquired ticket smarter the traffic if you will to that site was minimal and you've expressed in the last call how much. It has gone up it's dramatically gone off.

Speaking, we always talk about on these calls is getting you guys out there you have a great story, you're up 300% revenue year over year and things of that nature.

What can we do to utilize that traffic. If you will all of those people that are going to $2 million a month or whatever it is so tickets smarter to try and generate marketing for digital ally do you guys have plans to utilize that data in any way for that.

Yeah, absolutely and again I think when we acquired ticket smarter I mean, they were less than maybe 1 million visitors.

Maybe even a year whatever forest organically and we're seeing.

North of $5 million a month now so we're getting the traffic is just okay are people ready to go or are they going to buy.

We're very very efficient.

In regards to how we go about.

Growing these relationships these partnerships and also like.

The professional fees.

<unk> I mean, I think Yahoo, finance and Bazonga in seeking alpha.

Lot of those entities pick this up as well and will be on their website and these others website as official partners. So.

Again, we acquired them.

Timber one.

We're learning their business, we've given them the capital.

Seek out these partnerships and now we've got to give them a little bit of time.

Make sure that all the integrations in there and then.

To see the growth but.

I don't know I don't even know the multiple bolt to use in regards to how much we've increased traffic too.

<unk> ticket smarter.

Well again guys congrats on the quarter I'm glad to see that there is still more growth coming and good luck in the next quarter. Thank you for your time.

Thank you Brian .

As a reminder, if you would like to ask a question. Please press star followed by the number one on your telephone keypad again that is star then the number one. Your next question comes from the line of Mike Albani's Ian Hudson.

Your line is open.

Hey, guys. Thanks for taking my question just kind of a quick follow up I know you guys provided a lot of great detail Tonight. So much appreciate it I just wanted to go back to the RCM business real quick hopefully just kind of get a little bit more color and a better understanding around the medical billing versus dental billing a bit.

<unk> you talked about.

How intent on building a high growth, but higher cost of customer acquisition.

Apologies if I missed this in the prepared remarks, but just help me understand why that is and then kind of what your thoughts are on that moving forward now that you've had a chance to.

I guess kind of compare the two do you want to continue to do.

Dental billing companies.

Maybe you could just add some color on that would be great.

Yes, Mike Thanks for that question good question, yes.

Yes.

It'll billing is new to us new to our even our nobility partners in the joint venture there.

What you see there is there's so many more dental practices individuals' dental practices that need our service because they don't they don't have the volume too.

Employ.

On a full time billing and collection persons if you will that could spend their time and expertise learning the codes and all that and getting good collection results.

We provide that so it's a much more.

In demand, if you will and new to the business the medical billing side is.

A lot of people have done this for a lot of years. It is normal in the dental side, it's not so normal so that's why it's a.

A much higher growth business and.

And they do a lot of internet advertising.

And marketing that way and you get the click through revenues are click through inquiries in that so they're doing a national.

Our search for new customers and to acquire those new customers is more expensive incentive somebody out to.

Our clinic or are doctors.

Group two to talk to the doctors and such on a local basis. So.

Yes.

What that business it's.

The business, we acquired was really overstaffed from that standpoint and our.

Our template as to how we service the medical billing customers will help us in the billing side in the dental dental side as we integrate that and send it overseas to our billing practitioners if you will our contract.

So we see great growth in there on the medical billing side. The growth is much more slow if you will I mean, they do grow but it's very hard to acquire.

Our new debt.

Doctor practice or hospital or clinic or whatever.

For medical billing much easier on the on the dental billing side and it is national in nature.

Got it awesome. Thank you.

Thank you guys I wanted to shift over the phone line at this time I would now like to turn the call back to our speakers for any additional influencing remarks.

Well, thanks, everybody for joining us today.

We're excited to have reported the first quarter numbers, we will continue to.

Keep you aware of.

Vince that occur when they occur the best we can and look forward to continued conversations in the coming months as we keep rolling out.

In making acquisitions and wrapping up some quarters here. So thank you all for joining us.

Ladies and gentlemen, this concludes today's conference call. We thank you all for participating you may now disconnect.

Thank you.

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